<PAGE>
--------------------------------------------------------------------------------
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<S>                                            <C>
   For the quarter ended DECEMBER 31, 2000           Commission file number 000-25709
</TABLE>

                            ------------------------

                                   eTOYS INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                    <C>
              DELAWARE                              95-4633006
   (State or other jurisdiction of               (I.R.S. Employer
   incorporation or organization)               Identification No.)
</TABLE>

                           12200 W. OLYMPIC BOULEVARD
                         LOS ANGELES, CALIFORNIA 90064
               (Address of principal executive offices, zip code)

       Registrant's telephone number, including area code: (310) 998-6000

                            ------------------------

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /

    217,598,608 shares of $0.0001 par value common stock outstanding as of
February 12, 2001

                                  Page 1 of 38
                            Exhibit Index on Page 38

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                   ETOYS INC.
                                   FORM 10-Q
                    FOR THE QUARTER ENDED DECEMBER 31, 2000

                             PRELIMINARY STATEMENT

    Since December 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are expected to be sufficient to meet
our anticipated cash needs only to approximately March 31, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an additional, substantial capital infusion. We do not
believe that additional capital will be available to us.

    We have engaged Goldman, Sachs & Co. as our financial advisor to explore
strategic alternatives for the company, which might include a merger, asset
sale, or another comparable transaction or a financial restructuring. However,
in the event we are unsuccessful in completing one of these strategic
alternatives, we will be required to cease operations. In that case, our common
stock will have no value. In addition, potential investors in our securities
should consider the risk that, even if we are successful in completing a
strategic transaction as described above, our common stock will nonetheless have
no value.

    Any person considering an investment in any of our securities is urged to
consider both the risk that we will cease operations at or around March 31,
2001, and the risk that our securities will be worthless even assuming
completion of a strategic transaction. All of the statements set forth in this
report are qualified by reference to those facts. Please see "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Additional Factors That May Affect Future Results" for a discussion
of these and other risk factors relating to us and an investment in our
securities.
<PAGE>
                                   eTOYS INC.

                                   FORM 10-Q

                    FOR THE QUARTER ENDED DECEMBER 31, 2000

                                     INDEX

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
PART I--FINANCIAL INFORMATION
  Item 1. Consolidated Financial Statements.................      3
  Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations.................     14
  Item 3. Quantitative and Qualitative Disclosures About
        Market Risk.........................................     33

PART II--OTHER INFORMATION
  Item 1. Legal Proceedings.................................     35
  Item 2. Changes in Securities and Use of Proceeds.........     35
  Item 3. Defaults upon Senior Securities...................     35
  Item 4. Submission of Matters to a Vote of Security
        Holders.............................................     35
  Item 5. Other Information.................................     35
  Item 6. Exhibits and Reports on Form 8-K..................     36

Signatures..................................................     37
Exhibit Index...............................................     38
</TABLE>

                                       2
<PAGE>
PART I--FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                                   eTOYS INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                        QUARTER ENDED             NINE MONTHS ENDED
                                                        DECEMBER 31,                DECEMBER 31,
                                                  -------------------------   -------------------------
                                                     2000          1999          2000          1999
                                                  -----------   -----------   -----------   -----------
                                                  (UNAUDITED)   (UNAUDITED)   (UNAUDITED)   (UNAUDITED)
<S>                                               <C>           <C>           <C>           <C>
Net sales.......................................    $131,166     $ 106,751     $ 182,004     $ 128,032
Cost of sales...................................      99,317        86,467       138,866       103,676
                                                    --------     ---------     ---------     ---------
Gross profit....................................      31,849        20,284        43,138        24,356
Operating expenses:
  Marketing and sales...........................      72,174        66,017       127,381        97,602
  Web site and technology.......................      20,411        13,596        46,954        30,619
  General and administrative....................      10,694         4,002        24,788        11,256
  Goodwill amortization.........................       8,545         9,532        25,580        19,158
  Deferred compensation amortization............       2,760         3,495         8,977        10,591
                                                    --------     ---------     ---------     ---------
    Total operating expenses....................     114,584        96,642       233,680       169,226
                                                    --------     ---------     ---------     ---------
Operating loss..................................     (82,735)      (76,358)     (190,542)     (144,870)
Other income (expense):
  Interest income...............................         900         1,760         4,637         4,726
  Interest expense..............................      (3,981)         (889)      (10,280)       (1,069)
Provision for taxes.............................          (1)           --            (1)           (1)
                                                    --------     ---------     ---------     ---------
Net loss........................................     (85,817)      (75,487)     (196,186)     (141,214)
Accretion of discount and dividends on preferred
  stock.........................................      (3,418)           --       (12,514)           --
                                                    --------     ---------     ---------     ---------
Net loss applicable to common shareholders......    $(89,235)    $ (75,487)    $(208,700)    $(141,214)
                                                    ========     =========     =========     =========
Basic and diluted net loss per common share.....    $  (0.62)    $   (0.63)    $   (1.60)    $   (1.39)
                                                    ========     =========     =========     =========
Shares used in computation of basic and diluted
  net loss per common share.....................     144,002       119,716       130,297       101,944
                                                    ========     =========     =========     =========
</TABLE>

                            See accompanying notes.

                                       3
<PAGE>
                                   eTOYS INC.

                          CONSOLIDATED BALANCE SHEETS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    MARCH 31,
                                                                  2000          2000
                                                              -------------   ---------
                                                               (UNAUDITED)
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................    $  62,767     $ 139,627
  Inventories...............................................       67,671        60,309
  Prepaids and other current assets.........................       19,677        14,350
                                                                ---------     ---------
Total current assets........................................      150,115       214,286
Property and equipment......................................      158,556        60,717
  Accumulated depreciation and amortization.................      (22,004)       (6,229)
                                                                ---------     ---------
                                                                  136,552        54,488
Goodwill (net of accumulated amortization of $51,365 and
  $25,786 at December 31, 2000 and March 31, 2000,
  respectively).............................................      118,890       142,828
Other assets................................................       11,375        13,556
                                                                ---------     ---------
Total assets................................................    $ 416,932     $ 425,158
                                                                =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $  74,367     $  32,422
  Accrued expenses..........................................       13,148        10,789
  Current portion of long-term notes payable and capital
    lease obligations.......................................       19,773         6,090
                                                                ---------     ---------
Total current liabilities...................................      107,288        49,301
Long-term notes payable and capital lease obligations.......       27,730        10,471
Long-term convertible subordinated notes....................      150,000       150,000
Series D Redeemable Convertible Preferred Stock: $.0001 par
  value, 10,000 shares authorized; 2,367 and none issued and
  outstanding at December 31, 2000 and March 31, 2000,
  respectively..............................................       18,324            --
Commitments and contingencies
Stockholders' equity:
  Common stock: $.0001 par value, 600,000,000 shares
    authorized; 178,397,368 and 121,214,105 issued and
    outstanding at December 31, 2000 and March 31, 2000,
    respectively............................................           18            12
  Additional paid-in capital................................      563,071       476,529
  Receivables from stockholders.............................         (549)       (1,817)
  Deferred compensation.....................................      (18,701)      (37,082)
  Accumulated other comprehensive loss......................       (1,096)       (1,803)
  Accumulated deficit.......................................     (429,153)     (220,453)
                                                                ---------     ---------
Total stockholders' equity..................................      113,590       215,386
                                                                ---------     ---------
Total liabilities and stockholders' equity..................    $ 416,932     $ 425,158
                                                                =========     =========
</TABLE>

                            See accompanying notes.

                                       4
<PAGE>
                                   eTOYS INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                      ACCUMULATED
                                   COMMON STOCK        ADDITIONAL   RECEIVABLES                          OTHER
                              ----------------------    PAID-IN         FROM          DEFERRED       COMPREHENSIVE    ACCUMULATED
                                SHARES       AMOUNT     CAPITAL     STOCKHOLDERS    COMPENSATION         LOSS           DEFICIT
                              -----------   --------   ----------   ------------   --------------   ---------------   ------------
<S>                           <C>           <C>        <C>          <C>            <C>              <C>               <C>
Balance at March 31, 2000...  121,214,105     $12       $476,529      $(1,817)        $(37,082)         $(1,803)       $(220,453)
  Exercise of stock options
    and warrants............    1,151,632      --            779           --               --               --               --
  Issuance of common stock
    under Employee Stock
    Purchase Plan...........      361,067      --          1,672           --               --               --               --
  Common stock issued for
    acquisition of eParties
    Inc.....................      250,000      --          1,641           --               --               --               --
  Deferred compensation, net
    of cancellations........           --      --         (9,404)          --            9,404               --               --
  Amortization of deferred
    compensation............           --      --             --           --            8,977               --               --
  Repayment of receivables
    from stockholders.......           --      --             --        1,192               --               --               --
  Forfeiture of non-vested
    restricted stock........      (52,285)     --            (76)          76               --               --               --
  Beneficial conversion
    feature from issuance of
    Series D Redeemable
    Convertible Preferred
    Stock...................           --      --         10,000           --               --               --               --
  Issuance of warrants to
    purchase common stock in
    connection with the
    Series D Redeemable
    Convertible Preferred
    Stock offering..........           --      --         15,855           --               --               --               --
  Dividends on Series D
    Redeemable Convertible
    Preferred Stock.........      771,858      --          2,832           --               --               --           (2,832)
  Accretion of discount on
    Series D Redeemable
    Convertible Preferred
    Stock...................           --      --             --           --               --               --           (9,682)
  Conversion of Series D
    Redeemable Convertible
    Preferred Stock into
    common stock............   54,700,991       6         63,243           --               --               --               --
  Comprehensive loss:
    Net loss................           --      --             --           --               --               --         (196,186)
    Net unrealized gain on
      investments...........           --      --             --           --               --            1,641               --
    Foreign currency
      translation loss......           --      --             --           --               --             (934)              --
  Comprehensive loss........
                              -----------     ---       --------      -------         --------          -------        ---------
Balance at December 31,
  2000......................  178,397,368     $18       $563,071      $  (549)        $(18,701)         $(1,096)       $(429,153)
                              ===========     ===       ========      =======         ========          =======        =========

<CAPTION>

                                TOTAL
                              ---------
<S>                           <C>
Balance at March 31, 2000...  $ 215,386
  Exercise of stock options
    and warrants............        779
  Issuance of common stock
    under Employee Stock
    Purchase Plan...........      1,672
  Common stock issued for
    acquisition of eParties
    Inc.....................      1,641
  Deferred compensation, net
    of cancellations........         --
  Amortization of deferred
    compensation............      8,977
  Repayment of receivables
    from stockholders.......      1,192
  Forfeiture of non-vested
    restricted stock........         --
  Beneficial conversion
    feature from issuance of
    Series D Redeemable
    Convertible Preferred
    Stock...................     10,000
  Issuance of warrants to
    purchase common stock in
    connection with the
    Series D Redeemable
    Convertible Preferred
    Stock offering..........     15,855
  Dividends on Series D
    Redeemable Convertible
    Preferred Stock.........         --
  Accretion of discount on
    Series D Redeemable
    Convertible Preferred
    Stock...................     (9,682)
  Conversion of Series D
    Redeemable Convertible
    Preferred Stock into
    common stock............     63,249
  Comprehensive loss:
    Net loss................   (196,186)
    Net unrealized gain on
      investments...........      1,641
    Foreign currency
      translation loss......       (934)
                              ---------
  Comprehensive loss........   (195,479)
                              ---------
Balance at December 31,
  2000......................  $ 113,590
                              =========
</TABLE>

                            See accompanying notes.

                                       5
<PAGE>
                                   eTOYS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                    DECEMBER 31,
                                                              -------------------------
                                                                 2000          1999
                                                              -----------   -----------
                                                              (UNAUDITED)   (UNAUDITED)
<S>                                                           <C>           <C>
OPERATING ACTIVITIES
Net loss....................................................   $(196,186)    $(141,214)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation..............................................      15,650         3,305
  Amortization of intangibles...............................      27,246        19,645
  Deferred compensation amortization related to stock
    options.................................................       8,977        10,591
  Other, net................................................         153           145
  Changes in operating assets and liabilities:
    Inventories.............................................      (7,362)      (55,327)
    Prepaids and other current assets.......................      (1,141)      (11,123)
    Accounts payable........................................      42,547        74,907
    Accrued expenses........................................       2,317         4,119
                                                               ---------     ---------
Net cash used in operations.................................    (107,799)      (94,952)

INVESTING ACTIVITIES
Capital expenditures for property and equipment.............     (97,579)      (28,274)
Proceeds from the sale of property and equipment............      16,357         2,564
Net cash received from acquisition of BabyCenter, net of
  acquisition costs.........................................          --         2,571
Other, net..................................................      (1,731)       (2,738)
                                                               ---------     ---------
Net cash used in investing activities.......................     (82,953)      (25,877)

FINANCING ACTIVITIES
Proceeds from the issuance of convertible subordinated
  notes.....................................................          --       150,000
Debt financing costs........................................          --        (4,810)
Net proceeds from issuance of Series D Redeemable
  Convertible Preferred Stock...............................      97,788            --
Proceeds from issuance of common stock and exercise of stock
  options...................................................       2,428       177,632
Proceeds from notes payable and revolving credit facility...     118,687            --
Payments on notes payable, capital leases and revolving
  credit facility...........................................    (105,269)       (2,229)
Proceeds from receivables from stockholders.................       1,192           138
                                                               ---------     ---------
Net cash provided by financing activities...................     114,826       320,731
Effect of foreign exchange rate changes on cash.............        (934)         (146)
                                                               ---------     ---------
Net increase (decrease) in cash and cash equivalents........     (76,860)      199,756
Cash and cash equivalents at beginning of period............     139,627        20,173
                                                               ---------     ---------
Cash and cash equivalents at end of period..................   $  62,767     $ 219,929
                                                               =========     =========
Supplemental disclosures:
  Income taxes paid.........................................   $       1     $       1
  Interest paid.............................................   $  11,448     $     359
  Notes payable and capital lease obligations incurred......   $  17,524     $  11,434
  Acquisition of BabyCenter:
    Fair value of assets acquired (including goodwill)......   $      --     $ 197,634
    Liabilities assumed.....................................          --        (9,017)
    Stock issued............................................          --      (189,987)
    Assumption of receivables from stockholders.............          --         1,862
                                                               ---------     ---------
    Cash paid...............................................          --           492
    Cash acquired...........................................          --        (3,063)
                                                               ---------     ---------
Net cash received from acquisition of BabyCenter............   $      --     $   2,571
                                                               =========     =========
</TABLE>

                            See accompanying notes.

                                       6
<PAGE>
                                   eTOYS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

1. ACCOUNTING POLICIES

UNAUDITED INTERIM FINANCIAL INFORMATION

    The consolidated financial statements as of December 31, 2000 and 1999 have
been prepared by eToys Inc. ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). These
statements are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and accruals) necessary
to present fairly the results for the periods presented. The balance sheet at
March 31, 2000 has been derived from the audited financial statements at that
date. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such SEC rules and regulations.
Operating results for the quarter and nine months ended December 31, 2000 are
not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2001. These consolidated financial statements should be
read in conjunction with the audited financial statements and the accompanying
notes included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2000.

    The Company's cash, cash equivalents and cash that may be generated from
operations are expected to be sufficient to meet its anticipated cash needs only
to approximately March 31, 2001, although there can be no assurance in this
regard. In order to continue operations beyond that date, the Company would
require an additional, substantial capital infusion. Management does not believe
that additional capital will be available to the Company.

    The Company has engaged Goldman, Sachs & Co. as its financial advisor to
explore strategic alternatives which might include a merger, asset sale or
another comparable transaction or a financial restructuring. However, in the
event that the Company is unsuccessful in completing one of these strategic
alternatives, the Company will be required to cease operations.

RECLASSIFICATIONS

    Certain prior-period balances have been reclassified to conform to the
current-period presentation.

CASH AND CASH EQUIVALENTS

    All highly liquid investments with maturities of three months or less at the
date of purchase are considered to be cash equivalents and are carried at cost
plus accrued interest, which approximates fair value.

INVENTORIES

    Inventories on hand consist of finished goods.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated.

                                       7
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

1. ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION

    The functional currency of the Company's foreign subsidiaries is the local
currency. Assets and liabilities of the foreign subsidiaries are translated into
U.S. dollars at the period end exchange rates, and revenues and expenses are
translated at average rates prevailing during the periods presented. Translated
adjustments are included in accumulated other comprehensive loss, a separate
component of stockholders' equity. Transaction gains or losses arising from
transactions denominated in a currency other than the functional currency of the
entity involved, which have been insignificant, are included in the consolidated
statements of operations.

USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

COMPREHENSIVE LOSS

    Comprehensive loss is composed of net loss, net unrealized gains or losses
on investments and foreign currency translation adjustments. Comprehensive loss
was $85.6 million and $75.6 million for the quarters ended December 31, 2000 and
1999, respectively, and $195.5 million and $141.4 million for the nine months
ended December 31, 2000 and 1999, respectively.

NET LOSS PER COMMON SHARE

    Basic and diluted net loss per common share is computed by dividing net loss
applicable to common shareholders, which consists of net loss less accretion of
discount and dividends on preferred stock, by the weighted average number of
common stock shares outstanding during each period. Shares associated with stock
options and the Series A, B, C and D Redeemable Convertible Preferred Stock are
not included because they are antidilutive. Effective upon the closing of the
Company's initial public stock offering in May 1999, the shares of Series A, B
and C Redeemable Convertible Preferred Stock automatically converted into common
stock and are included in the calculation of the weighted average number of
shares as of that date. During the quarter ended December 31, 2000,
4,533 shares of Series D Redeemable Convertible Preferred Stock have been
converted into 47,706,206 shares of common stock. During the nine months ended
December 31, 2000, 7,633 shares of Series D Redeemable Convertible Preferred
Stock have been converted into 54,700,991 shares of common stock. Such
conversions are included in the calculation of the weighted average number of
shares as of their respective dates of conversion.

                                       8
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

1. ACCOUNTING POLICIES (CONTINUED)
    The following table sets forth the computation of basic and diluted net loss
per common share for the periods indicated (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
                                        QUARTER ENDED        NINE MONTHS ENDED
                                        DECEMBER 31,           DECEMBER 31,
                                     -------------------   ---------------------
                                       2000       1999       2000        1999
                                     --------   --------   ---------   ---------
<S>                                  <C>        <C>        <C>         <C>
Numerator:
  Net loss.........................  $(85,817)  $(75,487)  $(196,186)  $(141,214)
  Dividends on preferred stock.....      (976)        --      (2,832)         --
  Accretion of discount and
    dividends on preferred stock...    (2,442)        --      (9,682)         --
                                     --------   --------   ---------   ---------
Net loss applicable to common
  shareholders.....................  $(89,235)  $(75,487)  $(208,700)  $(141,214)
                                     ========   ========   =========   =========
Denominator:
  Weighted average shares..........   144,002    119,716     130,297     101,944
                                     --------   --------   ---------   ---------
  Denominator for basic and diluted
    net loss per common share
    calculation....................   144,002    119,716     130,297     101,944
                                     ========   ========   =========   =========
Basic and diluted net loss per
  common share.....................  $  (0.62)  $  (0.63)  $   (1.60)  $   (1.39)
                                     ========   ========   =========   =========
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

    In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs" ("Issue 00-10"). Specifically, Issue
00-10 addresses in a sale transaction for goods, how the seller should classify
amounts billed and incurred for shipping and handling in the income statement,
and the composition or types of costs that would be required to be classified as
costs of sales. The EITF concluded that all shipping and handling billings to a
customer in a sale transaction represent the fees earned for the goods provided
and, accordingly, amounts billed related to shipping and handling should be
classified as revenue. The consensus does not address how costs incurred by the
seller for shipping and handling should be classified. The adoption of this
consensus will not impact the Company's financial position or results of
operations as the Company already records all charges for outbound shipping and
handling as revenue. All outbound shipping costs are classified as costs of
sales. All other fulfillment costs incurred for handling by the Company are
classified within marketing and sales expenses.

2. REVOLVING CREDIT FACILITY

    In November 2000, the Company entered into a secured revolving credit
facility (the "Credit Facility") providing for borrowings of up to $40 million.
The Credit Facility is collateralized by substantially all of the Company's
assets, including its inventory of children's and baby products located in the
Company's distribution centers. Availability under the Credit Facility is based
upon a formula of eligible inventory as defined in the Credit Facility
agreement. Borrowings under the Credit Facility bear interest, at the Company's
option, at either prime rate (9.5% as of December 31, 2000) plus 0.5% or

                                       9
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

2. REVOLVING CREDIT FACILITY (CONTINUED)
Libor plus the Libor rate margin (6.2% as of December 31, 2000 plus 2.75%).
Additionally, the Company is required to pay fees of 1.25% per annum for the
unused portion of the Credit Facility. The Credit Facility has a term of two
years and requires the Company to comply with certain financial convenants as
described in the Credit Facility agreement. As of December 31, 2000,
$8.9 million was outstanding under the Credit Facility. As of February 12, 2001,
all borrowings under the Credit Facility have been fully repaid.

3. LONG-TERM CONVERTIBLE SUBORDINATED NOTES

    In December 1999, the Company issued $150 million principal amount of
6.25% convertible subordinated notes (the "Convertible Notes") due December 1,
2004. In connection with the issuance of the Convertible Notes, the Company
incurred financing costs of $4.8 million, resulting in net proceeds to the
Company of $145.2 million. The Convertible Notes are unsecured and are
subordinated to existing and future senior debt as defined in the indenture
pursuant to which the Convertible Notes were issued. The principal amount of the
Convertible Notes will be due on December 1, 2004 and will bear interest at an
annual rate of 6.25%, payable twice a year, on June 1 and December 1, beginning
June 1, 2000, until the principal amount of the Convertible Notes is fully
repaid. The Convertible Notes may be converted into the Company's common stock
at the option of the holder at any time prior to December 1, 2004, unless the
Convertible Notes have been previously redeemed or repurchased by the Company.
The conversion rate, subject to adjustment in certain circumstances, is 13.5323
shares of the Company's common stock for each $1,000 principal amount of the
Convertible Notes, which is equivalent to a conversion price of approximately
$73.90 per share. Additionally, on or after December 1, 2002, the Company may
redeem all or a portion of the Convertible Notes that have not been previously
redeemed or repurchased, at any time at redemption prices set forth in the
indenture pursuant to which the Convertible Notes were issued, plus any accrued
and unpaid interest to the redemption date. The Company currently has an
effective shelf registration statement with the Securities and Exchange
Commission covering resales of the $150 million of Convertible Notes and common
stock issuable upon conversion of the Convertible Notes.

4. REDEEMABLE CONVERTIBLE PREFERRED STOCK

    On June 12, 2000, the Company issued 10,000 shares of non-voting Series D
Redeemable Convertible Preferred Stock ("Series D"), $10,000 stated value per
share, and warrants to purchase 5,018,296 shares of the Company's common stock
with a current warrant exercise price of $7.17375 per share in a private
placement to select institutional investors. The total proceeds of the offering
were $100.0 million. The Series D shares carry a dividend rate of 7% per annum,
payable semi-annually during the first year and quarterly thereafter or upon
conversion or redemption. At the Company's option, dividends may be paid in cash
or shares of common stock, subject to certain conditions described within the
documents relating to the issuance of Series D and related warrants.

    The Series D shares mature on June 12, 2003, subject to extension in some
circumstances, at which time the Series D shares must be redeemed or converted
at the Company's option. If the Company elects to redeem any Series D shares
outstanding on June 12, 2003, the amount required to be paid will be equal to
the liquidation preference of the Series D shares, which equals the price
originally paid for such shares plus accrued and unpaid dividends. If the
Company elects to convert any Series D shares

                                       10
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

4. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
outstanding on June 12, 2003, the Company will be required to issue shares in an
amount determined based upon the criteria described below.

    Both the Company and the holders of the Series D shares currently have the
right to convert the shares of Series D without restriction. Regardless of
whether the selling securityholders elect to convert or the Company requires
conversion, the number of shares of common stock to be issued upon conversion of
a Series D share is determined by dividing the sum of $10,000 plus accrued and
unpaid dividends by the applicable conversion price. The applicable conversion
price will be a percentage of the lowest closing bid price of the Company's
common stock for the five consecutive trading days ending on and including the
conversion date, provided that the conversion price will not exceed $25.00 per
share, subject to adjustment. The conversion percentage equaled 100% on
June 12, 2000 and then decreased permanently one percentage point on the first
day of every calendar month following June 12, 2000, provided that the
conversion percentage will never be less than 85%, except in the event the
Company requires conversion following the announcement of a merger transaction.

    The Company also has the right, provided specified conditions are satisfied,
to redeem some or all of the outstanding Series D shares for cash equal to a
percentage of the price paid for each preferred share plus accrued dividends.
The redemption percentage equaled 100% on June 12, 2000 and then increased
permanently one percentage point on the first day of every calendar month
following June 12, 2000, provided that the redemption percentage will never be
greater than 124%.

    The net cash proceeds of the offering, after expenses, were approximately
$97.8 million. The proceeds were further discounted by $15.9 million,
representing the valuation of the 5,018,296 warrants issued in connection with
the sale of the Series D shares, and $10.0 million allocated to the beneficial
conversion feature associated with the Series D shares. The beneficial
conversion feature represents the difference between the fair market value of
the Company's common stock on the date of conversion and the discounted
conversion price as described above that is available to the securityholders
upon conversion. The discount amounts representing the warrants valuation and
the issuance costs and expenses will be amortized, or accreted, over thirty-six
months and the amount representing the beneficial conversion feature will be
accreted over fifteen months in order to adjust the Series D shares to their
appropriate redemption value at any given point in time for the period that the
Series D shares are outstanding. The accretion amounts are charged against
accumulated deficit and are included in net loss applicable to common
shareholders in the calculation of net loss per common share. Additionally, the
7% dividend payable associated with the Series D shares are also charged against
accumulated deficit and are included in net loss applicable to common
shareholders in the calculation of net loss per common share. The accretion of
discount and dividends on the Series D shares was $3.4 million for the quarter
ended December 31, 2000 and $12.5 million for the nine months ended
December 31, 2000.

    As of December 31, 2000, 7,633 shares of Series D with an aggregate stated
value of $76.3 million, had been converted into 54,700,991 shares of the
Company's common stock, representing an average conversion rate of $1.40 per
share of common stock. Additionally, in December 2000, 771,858 shares of the
Company's common stock were issued in lieu of cash as a dividend payment on
Series D.

    For the period from January 1, 2001 to February 12, 2001, 718 shares of
Series D stock were converted into 38,565,669 shares of the Company's common
stock.

                                       11
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

5. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

    From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business, including employment-related claims and claims
of alleged infringement of trademarks, copyrights and other intellectual
property rights.

    Since December 15, 2000, the Company has stated that its cash, cash
equivalents and cash that may be generated from operations are expected to be
sufficient to meet its anticipated cash needs only to approximately March 31,
2001, although there can be no assurance in this regard. The Company has also
engaged an investment banking firm to explore strategic alternatives for the
Company, which might include a merger, asset sale, or another comparable
transaction or a financial restructuring. In order to preserve its cash and
extend the time period during which such a transaction might be consummated, the
Company has entered into a standstill agreement with an informal committee of
its unsecured creditors.

    Pursuant to this standstill agreement, through and including February 15
(which date is subject to extension if agreed to by the creditors committee),
the Company has agreed not to pay any past due debts and to operate under a
budget designed to maintain its current operations. As of December 31, 2000, the
Company's outstanding obligations included $150 million principal amount of its
6.25% convertible subordinated notes due December 1, 2004, $8.9 million of
borrowings under its revolving credit facility (the balance of which was zero as
of February 12, 2001), notes payable and capital lease obligations of $38.6
million, a trade payable balance of $38.1 million, a non-trade payable balance
of $36.3 million and accrued expenses of $13.1 million.

    The Company's agreement not to pay past due debts under the standstill
agreement may result in a default on some or all of these obligations. As a
result, the Company has become subject to approximately fifteen lawsuits seeking
collection of past due invoices totaling approximately $17.2 million from
various vendors. The Company has received numerous other threats of similar
litigation from other vendors and anticipates that it will become subject to
additional, comparable collection lawsuits in the future.

    Similarly, the Company has been threatened with litigation or other
collection procedures by a number of the lessors of its real property and
personal property. For instance, Kilroy Realty, L.P., the landlord of the
Company's headquarters building in Los Angeles, has declared a default under the
Company's lease and related promissory note and has drawn $15.0 million under a
letter of credit facility related thereto. In addition, Heller Financial
Leasing, Inc., the lessor of certain equipment used in the operation of the
Company's Blairs, Virginia distribution center, has threatened to bring a
lawsuit seeking payment of approximately $9.0 million due to the Company's
failure to post a letter of credit in the amount of approximately $2.1 million.

    The Company has also received notice from etoy corporation, the holder of
the "etoy" domain name, that it has filed a trademark infringement lawsuit
against the Company pertaining to the use of the Company's "eToys" trademark.
The Company believes this lawsuit is without merit and intends to vigorously
defend against it.

    The Company believes that it will increasingly become subject to claims,
lawsuits and other comparable collection procedures such as those described
above due to its obligations under the

                                       12
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
standstill agreement and the fact that its cash, cash equivalents and cash that
may be generated from operations are expected to be sufficient to meet its
anticipated cash needs only to approximately March 31, 2001. After that date,
the Company would be required to cease operations unless it is able to
consummate a strategic transaction or financial restructuring.

6. STOCKHOLDERS' EQUITY

    In March 1999, the Company's Board of Directors declared a stock split of
three shares for every one share of common stock then outstanding. The stock
split was effective May 24, 1999, the date the Company's public offering of
common stock closed. Accordingly, the accompanying financial statements and
footnotes have been restated to reflect the stock split. The par value of the
shares of common stock to be issued in connection with the stock split was
credited to common stock and a like amount charged to additional paid-in
capital.

    On May 24, 1999, the Company completed its initial public offering of
9,568,000 shares of its common stock. Net proceeds to the Company aggregated
$175.8 million. As of the closing date of the offering, all of the Series A, B
and C convertible preferred stock then outstanding was converted into an
aggregate of 58,779,267 shares of common stock.

7. DEFERRED COMPENSATION

    The following table shows the amounts of deferred compensation amortization
that would have been recorded under the following income statement categories
had deferred compensation amortization not been separately stated in the
consolidated statements of operations (in thousands):

<TABLE>
<CAPTION>
                                                QUARTER ENDED       NINE MONTHS ENDED
                                                DECEMBER 31,          DECEMBER 31,
                                             -------------------   -------------------
                                               2000       1999       2000       1999
                                             --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>
Marketing and sales........................   $  713     $  903     $2,319    $ 2,737
Web site and technology....................      904      1,145      2,941      3,470
General and administrative.................    1,143      1,447      3,717      4,384
                                              ------     ------     ------    -------
                                              $2,760     $3,495     $8,977    $10,591
                                              ======     ======     ======    =======
</TABLE>

                                       13
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

    This Form 10-Q and the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact made by us in this Form 10-Q are forward-looking.
In particular, the statements herein regarding industry prospects and our future
results of operations or financial position are forward-looking statements.
Forward-looking statements reflect our current expectations and are inherently
uncertain. Our actual results may differ significantly from our expectations,
and we assume no responsibility to update forward-looking statements made
herein. The section entitled "Additional Factors That May Affect Future Results"
describes some, but not all, of the factors that could cause these differences.

    Since December 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are expected to be sufficient to meet
our anticipated cash needs only to approximately March 31, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an additional, substantial capital infusion. We do not
believe that additional capital will be available to us. Although we have
engaged Goldman, Sachs & Co. as our financial advisor to explore strategic
alternatives for the company, if we are unsuccessful in completing a strategic
transaction, we will be required to cease operations. In that case, our common
stock would have no value. In addition, potential investors in our securities
should consider the risk that, even if we are successful in completing a
strategic transaction as described above, our common stock will nonetheless have
no value. Any person considering an investment in any of our securities is urged
to consider both the risk that we will cease operations at or around March 31,
2001 and the risk that our securities will be worthless even assuming completion
of a strategic transaction. All of the statements set forth in this report are
qualified by reference to those facts.

    In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" ("Issue
00-10"). Specifically, Issue 00-10 addresses in a sale transaction for goods,
how the seller should classify amounts billed and incurred for shipping and
handling in the income statement, and the composition or types of costs that
would be required to be classified as costs of sales. The EITF concluded that
all shipping and handling billings to a customer in a sale transaction represent
the fees earned for the goods provided and, accordingly, amounts billed related
to shipping and handling should be classified as revenue. However, the EITF
overturned its previous tentative conclusion that all costs incurred by the
seller for shipping and handling should be classified as cost of sales. In
addition, the EITF decided not to address the types of costs that would be
required to be classified as costs of sales. The adoption of this consensus will
not impact our financial position or results of operations as we already record
all charges for outbound shipping and handling as revenue. All outbound shipping
costs are classified as costs of sales. We currently record all other
fulfillment costs incurred for handling within marketing and sales expenses.

                                       14
<PAGE>
RESULTS OF OPERATIONS

NET SALES

<TABLE>
<CAPTION>
                                      QUARTER ENDED                  NINE MONTHS ENDED
                                      DECEMBER 31,                     DECEMBER 31,
                                   -------------------              -------------------
                                     2000       1999     % CHANGE     2000       1999     % CHANGE
                                   --------   --------   --------   --------   --------   --------
                                     (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                <C>        <C>        <C>        <C>        <C>        <C>
    Net sales....................  $131,166   $106,751      23%     $182,004   $128,032      42%
</TABLE>

    Net sales consist of product sales to customers and charges to customers for
outbound shipping and handling and gift wrapping and are net of product returns,
promotional discounts and coupons. The growth in net sales for the quarter ended
and nine months ended December 31, 2000 as compared to the same periods in the
prior year reflects an increase in units sold due to the growth of our customer
base, repeat purchases from our existing customers and growth in our baby and
toy categories, partially offset by a downturn in video game sales. Cumulative
customer accounts increased to 3.4 million during the quarter ended
December 31, 2000 as compared to 1.7 million cumulative customer accounts at
December 31, 1999. International sales, which consists of export sales to
customers outside the US from our US Web site as well as sales by our Web site
in the United Kingdom, eToys.co.uk, to customers within the United Kingdom and
Europe, were not material during the quarter ended and nine months ended
December 31, 2000. It should be noted that net sales for the quarter ended
December 31, 2000 were substantially below our original estimate of $210 million
to $240 million, due to a harsh retail climate and dampened enthusiasm for
Internet retailing. This shortfall had a material negative impact on our results
of operations and financial condition for the quarter and have caused us to seek
a strategic transaction or financial restructuring or, in the absence of these
alternatives, cease operations by approximately March 31, 2001.

GROSS PROFIT

<TABLE>
<CAPTION>
                                          QUARTER ENDED                  NINE MONTHS ENDED
                                          DECEMBER 31,                     DECEMBER 31,
                                       -------------------              -------------------
                                         2000       1999     % CHANGE     2000       1999     % CHANGE
                                       --------   --------   --------   --------   --------   --------
                                         (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>
    Gross profit.....................  $31,849    $20,284       57%     $43,138    $24,356       77%
</TABLE>

    Gross profit is net sales less cost of sales, which consists of the costs of
products sold to customers, outbound and inbound shipping costs, and gift
wrapping costs. Gross profit increased in absolute dollars for the quarter ended
and nine months ended December 31, 2000 as compared to the same periods in the
prior year, reflecting our increased sales volume. Our gross profit increased as
a percentage of net sales by approximately 5.3% and 4.7% for the quarter ended
and nine months ended December 31, 2000, respectively, as compared to the same
periods in the prior year. This increase in gross profit as a percentage of net
sales is primarily attributable to a continuing shift towards higher margin
specialty products, including products and advertising sold by our BabyCenter
unit.

    Shipping margins were adversely impacted for the nine months ended
December 31, 2000 as compared to the same period in the prior year primarily due
to inefficiencies in the start-up of our bi-coastal distribution centers and an
increase in the shipments of larger merchandise which have higher shipping
costs. This adverse impact was partially offset in the quarter ended
December 31, 2000 due to the initial operation of our new East Coast
distribution center locations in Danville, Virginia and Greensboro, North
Carolina. These new locations began shipping operations in June 2000 and allowed
us to reduce the costs incurred from shipping since they are located closer to
the majority of our customers. Prior to June 2000, overall shipping margins were
adversely impacted by the location of our distribution centers principally in
the western United States. This resulted in increased shipping

                                       15
<PAGE>
costs as we shipped cross-country to the majority of our customer base located
in the eastern United States.

    Shipping margin, which represents shipping revenues less outbound shipping
costs included in cost of sales, was a profit of $0.3 million for the quarter
ended December 31, 2000 as compared to a loss of $3.7 million for the quarter
ended December 31, 1999. Shipping margin resulted in a loss of $1.6 million and
$4.0 million for the nine months ended December 31, 2000 and 1999, respectively.

MARKETING AND SALES

<TABLE>
<CAPTION>
                                         QUARTER ENDED                  NINE MONTHS ENDED
                                         DECEMBER 31,                     DECEMBER 31,
                                      -------------------              -------------------
                                        2000       1999     % CHANGE     2000       1999     % CHANGE
                                      --------   --------   --------   --------   --------   --------
                                        (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>
    Marketing and sales.............  $72,174    $66,017        9%     $127,381   $97,602       31%
</TABLE>

    Marketing and sales expenses consist of advertising expense, fulfillment,
customer service and credit card fees, and other marketing and sales expense,
including personnel and general overhead. Marketing and sales expenses increased
in absolute dollars for the quarter ended and nine months ended December 31,
2000 as compared to the same periods in the prior year. This increase is
primarily attributable to increases in our advertising and promotional
expenditures for the holiday season, increased payroll and related costs for
receiving inventory and fulfilling the higher level of customer demand, and
additional costs incurred in the expansion of our distribution facilities.
Marketing and sales expenses decreased as a percentage of net sales during the
quarter ended and nine months ended December 31, 2000 as compared to the same
periods in the prior year due to the increase in net sales during such periods.

    Advertising expense was $38.7 million, or 30% of net sales, for the quarter
ended December 31, 2000 and $60.2 million, or 33% of net sales, for the nine
months ended December 31, 2000.

    Fulfillment, customer service and credit card fees were $33.9 million, or
26% of net sales, for the quarter ended December 31, 2000 and $59.6 million, or
33% of net sales, for the nine months ended December 31, 2000. In addition,
marketing and sales expenses were favorably impacted for the quarter and nine
months ended December 31, 2000 by the recovery of a $7.7 million reserve related
to resolution of a third party vendor dispute in our favor.

    On March 31, 2000, we ceased receiving fulfillment services from our
third-party vendor, Fingerhut Business Services, and since that time we have
relied solely on our own distribution centers. The transition of inventory from
Fingerhut facilities was completed during July 2000. Total costs incurred
associated with this transition were not material.

WEB SITE AND TECHNOLOGY

<TABLE>
<CAPTION>
                                          QUARTER ENDED                  NINE MONTHS ENDED
                                          DECEMBER 31,                     DECEMBER 31,
                                       -------------------              -------------------
                                         2000       1999     % CHANGE     2000       1999     % CHANGE
                                       --------   --------   --------   --------   --------   --------
                                         (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>
    Web site and technology..........  $20,411    $13,596       50%     $46,954    $30,619       53%
</TABLE>

    Web site and technology expenses consist primarily of payroll and related
expenses for merchandising, development, and systems and telecommunications
personnel, and infrastructure costs related to systems and telecommunications.
Web site and technology also includes costs related to the development of
internal-use software. All development costs incurred in the preliminary project
stage, as well as maintenance and training, are expensed as incurred. Certain
plans of development are so uncertain that it is not probable that they will be
completed and are therefore expensed when incurred. Once the development project
has completed the preliminary project stage and it is deemed probable

                                       16
<PAGE>
that the project will be completed and used as intended, the project is
considered to have moved into the application development stage. All costs
incurred for the development or purchase of internal-use software that are
incurred in the application development stage are capitalized as incurred within
property and equipment and amortized over their estimated useful lives.

    Web site and technology expenses increased in absolute dollars for the
quarter ended and nine months ended December 31, 2000 as compared to the same
periods in the prior year. This increase is primarily attributable to increased
expenses associated with our significant investment in both front-end and
back-end infrastructure and maintenance of our existing systems and
telecommunications hardware. This included increased staffing of systems and
telecommunication personnel, increased investment in systems and
telecommunications hardware as well as increased costs incurred for projects
intended to enhance the features, content and functionality of our Web site and
transaction-processing systems. Such project costs arise from either costs
incurred in the preliminary development stage, which are expensed as incurred,
or from amortization of such project costs that had been capitalized within the
quarter or a previous period and have been placed into service. Web site and
technology expenses increased as a percentage of net sales during the quarter
ended and nine months ended December 31, 2000 as compared to the same periods in
the prior year due to the shortfall in net sales for the quarter ended
December 31, 2000 which were substantially below our original expectations.

GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
                                           QUARTER ENDED                  NINE MONTHS ENDED
                                           DECEMBER 31,                     DECEMBER 31,
                                        -------------------              -------------------
                                          2000       1999     % CHANGE     2000       1999     % CHANGE
                                        --------   --------   --------   --------   --------   --------
                                          (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                     <C>        <C>        <C>        <C>        <C>        <C>
    General and administrative........  $10,694     $4,002      167%     $24,788    $11,256      120%
</TABLE>

    General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expenses increased in absolute dollars for the quarter ended and
nine months ended December 31, 2000 as compared to the same period in the prior
year. This increase was primarily due to increased headcount and associated
costs, professional fees, facilities and other related costs. General and
administrative expenses increased as a percentage of net sales during the
quarter ended and nine months ended December 31, 2000 as compared to the same
periods in the prior year due to the shortfall in net sales for the quarter
ended December 31, 2000 which were substantially below our original
expectations.

GOODWILL AND INTANGIBLE ASSETS AMORTIZATION

<TABLE>
<CAPTION>
                                            QUARTER ENDED                  NINE MONTHS ENDED
                                            DECEMBER 31,                     DECEMBER 31,
                                         -------------------              -------------------
                                           2000       1999     % CHANGE     2000       1999     % CHANGE
                                         --------   --------   --------   --------   --------   --------
                                           (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                      <C>        <C>        <C>        <C>        <C>        <C>
    Goodwill amortization..............   $8,545     $9,532      (10)%    $25,580    $19,158       34%
</TABLE>

    Goodwill represents the excess of the purchase price over the fair value of
the net tangible assets acquired in a business combination. As a result of the
acquisition of BabyCenter on July 1, 1999, we recorded goodwill of approximately
$189.0 million, which is being amortized over five years. Additionally, in
June 2000 we completed the acquisition of certain assets of eParties Inc. which
resulted in recording approximately $1.6 million of goodwill. The $1.6 million
of goodwill arising from the eParties acquisition is also being amortized over
five years. Accordingly, goodwill amortization for the quarter ended and nine
months ended December 31, 2000 reflects amortization of goodwill from the
BabyCenter and eParties purchases, in addition to amortization of goodwill
recorded from a previous acquisition. In January 2000, we completed the sale of
substantially all of the assets and related liabilities of BabyCenter's Consumer
Health Interactive division for approximately $20 million in a

                                       17
<PAGE>
combination of cash and registrable securities. As a result of the sale,
goodwill amortization has decreased in amounts proportionate to the sale
proceeds due to the reduction of goodwill related to CHI. To the extent that we
do not generate additional sufficient cash flow to recover the amount of the
investment in acquired assets recorded, the investment may be considered
impaired or be subject to earlier write-off. In such event, our net loss in any
given period could be greater than anticipated.

DEFERRED COMPENSATION AMORTIZATION

<TABLE>
<CAPTION>
                                             QUARTER ENDED                  NINE MONTHS ENDED
                                             DECEMBER 31,                     DECEMBER 31,
                                          -------------------              -------------------
                                            2000       1999     % CHANGE     2000       1999     % CHANGE
                                          --------   --------   --------   --------   --------   --------
                                            (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>
    Deferred compensation
      amortization......................   $2,760     $3,495      (21)%     $8,977    $10,591      (15)%
</TABLE>

    In the fiscal years ended March 31, 2000 and 1999, we recorded total
deferred stock compensation of $58.5 million in connection with stock options
granted during these periods. This amount represents the difference between the
exercise price of stock option grants and the deemed fair value of our common
stock at the time of such grants. Such amount has been reduced as a result of
amortization of deferred stock compensation initially recorded as well as
subsequent cancellations of stock options that originally generated the deferred
stock compensation charge. Deferred stock compensation is amortized to expense
over the vesting periods of the applicable options. Deferred compensation
amortization decreased for the quarter ended and nine months ended December 31,
2000 as compared to the same period in the prior year. This decrease was
primarily due to subsequent cancellations of stock options that originally
generated the deferred stock compensation charge. We expect to record
$2.4 million of amortization over the remaining three months ended March 31,
2001.

    Amortization of deferred compensation for each of the next three fiscal
years is expected to be as follows:

<TABLE>
<CAPTION>
                                                               AMOUNTS
                                                                 IN
YEAR ENDED                                                    THOUSANDS
----------                                                    ---------
<S>                                                           <C>
March 31, 2002..............................................   $9,605
March 31, 2003..............................................    6,537
March 31, 2004..............................................      156
</TABLE>

INTEREST INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                          QUARTER ENDED                  NINE MONTHS ENDED
                                          DECEMBER 31,                     DECEMBER 31,
                                       -------------------              -------------------
                                         2000       1999     % CHANGE     2000       1999     % CHANGE
                                       --------   --------   --------   --------   --------   --------
                                         (IN THOUSANDS)                   (IN THOUSANDS)
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>
    Interest income..................  $   900     $1,760       (49)%   $  4,637   $ 4,726        (2)%
    Interest expense.................  $(3,981)    $ (889)      348%    $(10,280)  $(1,069)      862%
</TABLE>

    Interest income consists of earnings on our cash and cash equivalents.
Interest income decreased for the quarter ended and nine months ended
December 31, 2000 as compared to the same periods in the prior year. This
decrease was due to lower cash balances as compared to the same periods in the
prior year. Interest expense consists primarily of interest from the issuance of
the Convertible Notes, the amortization of debt financing costs related to the
Convertible Notes, interest on borrowings under our revolving credit facility as
well as interest on asset acquisitions financed through notes payable and
capital leases. Interest expense increased for the quarter ended and nine months
ended December 31, 2000 as compared to the same periods in the prior year
primarily due to interest on the Convertible Notes and additional asset
acquisitions financed through notes payable and capital lease obligations.

                                       18
<PAGE>
INCOME TAXES

    We have not generated any taxable income to date and therefore have not paid
any federal income taxes since inception. Utilization of our net operating loss
carryforwards, which begin to expire in 2012, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability.

LIQUIDITY AND CAPITAL RESOURCES

    At December 31, 2000, the Company's principal source of liquidity consisted
of $62.8 million of cash and cash equivalents compared to $139.6 million of cash
and cash equivalents at March 31, 2000.

    Net cash used in operating activities for the nine months ended
December 31, 2000 and 1999 was $107.8 million and $95.0 million, respectively.
Net operating cash flows for the nine months ended December 31, 2000 and 1999
were primarily attributable to net losses, reduced by noncash charges of
depreciation and amortization, as well as increases in inventories and prepaid
expenses and other current assets, which were offset by increases in accounts
payable and accrued expenses.

    Net cash used in investing activities for the nine months ended December 31,
2000 was $83.0 million and consisted of purchases of fixed assets and other
assets, partially offset by proceeds from the sale of fixed assets in
sale-leaseback transactions. Net cash used in investing activities for the nine
months ended December 31, 1999 was $25.9 million and primarily consisted of
purchases of fixed assets and other assets, partially offset by proceeds from
the sale of fixed assets in sale-leaseback transactions and cash received from
the acquisition of BabyCenter.

    Net cash provided by financing activities for the nine months ended December
31, 2000 was $114.8 million and resulted from the net proceeds from the issuance
of Series D Redeemable Convertible Preferred Stock, the issuance of common stock
and exercise of stock options, proceeds from notes payable and borrowings under
our revolving credit facility, partially offset by payments on notes payable,
capital leases and our revolving credit facility. Net cash provided by financing
activities for the nine months ended December 31, 1999 was $320.7 million and
resulted from net proceeds from the issuance of common stock in our initial
public offering and proceeds from the issuance of the Convertible Notes,
partially offset by debt financing costs incurred as a result of the issuance of
the Convertible Notes and payments on notes payable and capital leases.

    As of December 31, 2000, our outstanding liabilities included, among other
things, the $150 million of Convertible Notes, borrowings under our revolving
credit facility of $8.9 million, notes payable and capital lease obligations of
$38.6 million, a trade payable balance of $38.1 million, a non-trade payable
balance of $36.3 million and accrued expenses of $13.1 million. Additionally, as
of December 31, 2000, we also have operating lease obligations and future
advertising commitments.

    The Convertible Notes, issued in December 1999, are unsecured and are
subordinated to our existing and future senior debt as defined in the indenture
pursuant to which the Convertible Notes were issued. The principal amount of the
Convertible Notes will be due on December 1, 2004 and will bear interest at an
annual rate of 6.25%, payable twice a year, on June 1 and December 1, beginning
June 1, 2000, until the principal amount of the Convertible Notes is fully
repaid. The Convertible Notes may be converted into our common stock at the
option of the holder at any time prior to December 1, 2004, unless the
Convertible Notes have been previously redeemed or repurchased by us. The
conversion rate, subject to adjustment in certain circumstances, is 13.5323
shares of our common stock for each $1,000 principal amount of convertible
notes, which is equivalent to a conversion price of approximately $73.90 per
share. Additionally, on or after December 1, 2002, we may redeem all or a
portion of the Convertible Notes, that have not been previously redeemed or
repurchased, at any time at redemption prices set forth in the indenture
pursuant to which the Convertible Notes were issued,

                                       19
<PAGE>
plus any accrued and unpaid interest to the redemption date. Following March 31,
2001, we believe we will be unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on the Convertible Notes, in
which case we will be in default under the terms of the indenture, which could,
in turn, cause defaults under our other existing and future debt obligations.

    In November 2000, we entered into a secured revolving credit facility (the
"Credit Facility") providing for borrowings of up to $40.0 million. The Credit
Facility is collateralized by substantially all of our assets, including our
inventory of children's and baby products located in our distribution centers.
Availability under the Credit Facility is based upon a formula of eligible
inventory as defined in the Credit Facility agreement. Borrowings under the
Credit Facility bear interest, at our option, at either prime rate (9.5% as of
December 31, 2000) plus 0.5% or Libor plus the Libor rate margin (6.2% as of
December 31, 2000 plus 2.75%). Additionally, we are required to pay fees of
1.25% per annum for the unused portion of the Credit Facility. The Credit
Facility has a term of two years and requires us to comply with certain
financial covenants as described in the Credit Facility agreement. As of
December 31, 2000, $8.9 million was outstanding under the Credit Facility. As of
February 12, 2001, all borrowings under the Credit Facility have been fully
repaid. At this time, we do not believe that additional borrowings under the
Credit Facility would be made available to us if requested by us. Accordingly,
we do not consider the Credit Facility a source of liquidity for us.

    In December 1999, we entered into an eleven year lease agreement to relocate
our corporate offices. The lease began in October 2000. In connection with the
lease commitment, we delivered two letters of credit to the lessor totaling
$15.0 million, both of which were cash collateralized. In January 2001, the
landlord under the lease declared a default and drew the entire $15.0 million
available under the letter of credit. Accordingly, the cash used to
collateralize the letter of credit is unavailable to us and is not a source of
liquidity for us.

    On January 16, 2001, we entered into a standstill agreement with an informal
committee of our unsecured creditors. Pursuant to this agreement, through and
including February 15 (subject to extension by agreement of the committee), we
have agreed not to pay any past due debts and to operate under a budget designed
to maintain our current operations. Such non-payment of past due debts may
result in a default on some or all of the obligations described above.

    Since December 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are expected to be sufficient to meet
our anticipated cash needs only to approximately March 31, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an additional, substantial capital infusion. We do not
believe that additional capital will be available to us.

    We have engaged a financial advisor to explore strategic alternatives for
the company, which might include a merger, asset sale, or another comparable
transaction or a financial restructuring. However, in the event we are
unsuccessful in completing one of these strategic alternatives, we will be
required to cease operations by approximately March 31, 2001. In that case, we
will be unable to meet our future capital requirements. This would result in a
default under all of our indebtedness, including our $40 million revolving
credit facility (which had an outstanding balance of $8.9 million as of
December 31, 2000 but a balance of zero at February 12, 2001) and the
$150.0 million of our 6.25% convertible subordinated notes due December 1, 2004,
as well as the other obligations described above in this section. In that case,
our common stock will have no value. In addition, potential investors in our
securities should consider the risk that, even if we are successful in
completing a strategic transaction or financial restructuring, our common stock
will nonetheless have no value.

                                       20
<PAGE>
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

    In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the following additional risk
factors may affect our future results.

                     RISKS RELATED TO THE POSSIBILITY THAT
              WE MAY CEASE OPERATIONS AT OR AROUND MARCH 31, 2001

WE WILL CEASE OPERATIONS AT OR AROUND MARCH 31, 2001 UNLESS WE ARE SUCCESSFUL IN
OBTAINING ADDITIONAL CAPITAL OR IN PURSUING STRATEGIC ALTERNATIVES

    Our current cash, cash equivalents and cash generated from operations will
only be sufficient to meet our anticipated cash needs to approximately
March 31, 2001, although there can be no assurance in this regard. Accordingly,
we will require an additional, substantial capital infusion to continue our
operations. We do not believe that additional capital will be available to us.
In addition, we recently engaged a financial advisor to explore strategic
alternatives for us, which may include a merger, asset sale, or another
comparable transaction, or a financial restructuring. If we are unsuccessful in
completing a strategic transaction, we will be required to cease operations, and
our common stock will have no value. In addition, potential investors in our
securities should consider the risk that, even if we are successful in
completing a strategic transaction, our common stock will nonetheless have no
value.

OUR COMMON STOCK WILL LIKELY BE DELISTED

    We have received a notice from Nasdaq that our common stock has failed to
maintain the required minimum bid price of $1.00 over a period of 30 consecutive
trading days. As a result, Nasdaq has provided us with 90 calendar days, or
until May 2, 2001, to regain compliance with this requirement or be delisted
from trading. We believe it is unlikely that we will be able to regain
compliance with this requirement during this time period and that, by the end of
this time period, our securities will be delisted from trading by Nasdaq. In
that event, trading in shares of our common stock would decrease substantially
or cease altogether, and the market price of common stock would decline further,
potentially to zero. Furthermore, pursuant to the terms of the series D
preferred stock, we would be required to redeem the outstanding shares of
series D preferred stock as a result of the delisting of our common stock, but
it is likely we would not have the cash available to do so and would therefore
be in breach of the terms of our series D preferred stock.

AS A RESULT OF QUESTIONS CONCERNING OUR STATUS AS A GOING CONCERN, OUR CUSTOMERS
AND VENDORS MAY DECIDE NOT TO DO BUSINESS WITH US

    Due to concerns regarding our ability to continue operations, customers and
vendors are likely to decide not to conduct business with us, or may conduct
business with us on terms that are less favorable than those customarily
extended by them. In that event, our net sales would further decrease, and our
business will suffer significantly.

OUR BUSINESS WILL SUFFER AS A RESULT OF THE REDUCTION IN OUR WORKFORCE

    In January and February 2001, we issued job elimination notices to all of
our employees, with service dates extending up to April 6, 2001. The reduction
in workforce will negatively impact our ability to conduct business and serve
our customers in a manner comparable with past practice, which will cause our
business to suffer significantly.

                                       21
<PAGE>
                              RISKS RELATED TO OUR
                            SERIES D PREFERRED STOCK

THE CONVERSION OF OUR SERIES D PREFERRED SHARES HAS RESULTED IN SUBSTANTIAL
NUMBERS OF ADDITIONAL SHARES BEING ISSUED AS OUR MARKET PRICE DECLINED.

    On June 12, 2000, we issued 10,000 shares of our series D convertible
preferred stock, $10,000 stated value per share, and warrants to purchase
5,018,296 shares of our common stock with a current warrant exercise price of
$7.17375 per share. The series D preferred shares convert at a floating rate
based on the market price of our common stock. As a result, the lower the price
of our common stock at the time of conversion, the greater the number of shares
the holder will receive.

    As the series D preferred shares have been converted and dividends on the
series D preferred shares have been paid in shares of common stock rather than
cash, a significant number of shares of common stock have been be sold into the
market, which has decreased the price of our common stock and may have
encouraged short sales by selling securityholders or others. Short sales place
further downward pressure on the price of our common stock. We have been
required to issue an increasingly greater number of shares of our common stock
upon conversions of the series D preferred shares, sales of which further
depress the price of our common stock.

    The conversion of and the payment of dividends in shares of common stock in
lieu of cash on the series D preferred shares have resulted in substantial
dilution to the interests of other holders of our common stock. Even though no
selling securityholder may convert its series D preferred shares if upon such
conversion the selling securityholder together with its affiliates would have
acquired a number of shares of common stock during the 60-day period ending on
the date of conversion which, when added to the number of shares of common stock
held at the beginning of such 60-day period, would exceed 9.99% of our then
outstanding common stock, excluding for purposes of such determination shares of
common stock issuable upon conversion of series D preferred shares which have
not been converted and upon exercise of warrants which have not been exercised,
this restriction does not prevent a selling securityholder from selling a
substantial number of shares in the market. By periodically selling shares into
the market, an individual selling securityholder could eventually sell more than
9.99% of our outstanding common stock while never holding more than 9.99% at any
specific time.

    As of February 12, 2001, 8,351 shares of our Series D convertible preferred
stock, with an aggregate stated value of $83.5 million, had been converted into
93,266,660 shares of our common stock, representing an average conversion rate
of $0.90 per share of common stock.

WE MAY ISSUE ADDITIONAL SHARES, RESULTING IN DILUTION FOR EXISTING STOCKHOLDERS.

    Some events could result in the issuance of additional shares of our common
stock, which would result in dilution for existing stockholders. We may issue
additional shares of common stock or preferred stock:

    - upon the exercise or conversion of outstanding options, warrants and
      shares of convertible preferred stock, and/or

    - in lieu of cash payment of dividends.

    As of December 31, 2000, other than the warrants issued to the holders of
series D preferred shares, there were outstanding warrants to acquire an
aggregate of 13,803 shares of common stock, and there were outstanding options
to acquire an aggregate of 26,580,791 shares of common stock. If converted or
exercised, these securities would dilute the percentage ownership of common
stock by existing stockholders. These securities, unlike the common stock,
provide for anti-dilution protection upon the occurrence of stock splits,
redemptions, mergers, reclassifications, reorganizations and other similar
corporate transactions, and, in some cases, major corporate announcements. If
one or more of

                                       22
<PAGE>
these events occurs, the number of shares of common stock that may be acquired
upon conversion or exercise would increase. In addition, as disclosed in the
preceding risk factor, the number of shares that may be issued upon conversion
of or payment of dividends in lieu of cash on the series D preferred shares has
increased substantially as the market price of our common stock decreased during
the period the series D preferred shares have been outstanding.

SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL
  FURTHER.

    If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and upon conversion of
and issuance of common stock dividends on the series D preferred shares and
exercise of the related warrants, the market price of our common stock could
fall further. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. As of December 31, 2000, we had outstanding 178,397,368 shares of
common stock and options to acquire an aggregate of 26,580,791 shares of common
stock, of which 7,010,646 options were vested and exercisable. As of
December 31, 2000, of the shares that are currently outstanding, 138,350,662 are
freely tradeable in the public market and 40,046,706 are tradeable in the public
market subject to the restrictions, if any, applicable under Rule 144 and
Rule 145 of the Securities Act of 1933, as amended. All shares acquired upon
exercise of options will be freely tradeable in the public market.

    In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (a) one percent of the number of shares of common stock then
outstanding (which for eToys was 1,783,973 shares as of December 31, 2000) or
(b) the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
requirements with respect to manner of sale, notice, and the availability of
current public information about us. Under Rule 144(k), a person who is not
deemed to have been our affiliate at any time during the three months preceding
a sale, and who has beneficially owned the shares proposed to be sold for at
least two years, is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Sales by stockholders of a substantial amount of our common stock
could adversely affect the market price of our common stock.

WE MAY BE REQUIRED TO PAY SUBSTANTIAL PENALTIES TO THE HOLDERS OF THE SERIES D
PREFERRED SHARES AND RELATED WARRANTS IF SPECIFIC EVENTS OCCUR.

    In accordance with the terms of the documents relating to the issuance of
the series D preferred shares and the related warrants, we are required to pay
substantial penalties to a holder of the series D preferred shares under
specified circumstances, including, among others,

    - the nonpayment of dividends on the series D preferred shares in a timely
      manner,

    - our failure to deliver shares of our common stock upon conversion of the
      series D preferred shares or upon exercise of the related warrants after a
      proper request,

    - the nonpayment of the redemption price at maturity of the series D
      preferred shares, or

    - the registration statement relating to the series D preferred shares and
      related warrants is unavailable to cover the resale of the shares of
      common stock underlying such securities (with respect to at least one
      holder only a small number of shares remain available for sale under the
      registration statement, and we currently do not have plans to register
      additional shares, which may result in a breach of this provision).

                                       23
<PAGE>
    Such penalties are generally paid in the form of interest payments, subject
to any restrictions imposed by applicable law, on the amount that a holder of
series D preferred shares was entitled to receive on the date of determination.

                     RISKS RELATED TO OUR CONVERTIBLE NOTES

AS A RESULT OF THE ISSUANCE OF OUR CONVERTIBLE NOTES, WE HAVE A SIGNIFICANT
AMOUNT OF DEBT AND WILL LIKELY HAVE INSUFFICIENT CASH FLOW TO SATISFY OUR DEBT
SERVICE OBLIGATIONS.

    As a result of the issuance of $150 million of our 6.25% Convertible
Subordinated Notes due December 1, 2004, we have a significant amount of debt
and debt service obligations. As of December 31, 2000, in addition to the notes,
our outstanding liabilities included $8.9 million of borrowings under our
revolving credit facility, notes payable and capital lease obligations of
$38.6 million, a trade payable balance of $38.1 million, a non-trade payable
balance of $36.3 million and accrued expenses of $13.1 million. Following
March 31, 2001, we believe we will be unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments on the notes, in
which case we will be in default under the terms of the indenture which could,
in turn, cause defaults under our other existing and future debt obligations.

WE WILL LIKELY BE UNABLE TO REPURCHASE THE NOTES UPON THE OCCURRENCE OF A CHANGE
  OF CONTROL.

    Upon the occurrence of a change of control of eToys, we are required to
offer to repurchase all outstanding notes. If a change of control were to occur,
we would likely not have sufficient funds to repurchase the notes with cash. Our
failure to repurchase tendered notes upon a change of control would constitute
an event of default under the indenture, which could result in the acceleration
of the maturity of the notes and all of our other outstanding debt. These
repurchase requirements may also delay or make it harder for others to obtain
control of us.

CLAIMS BY HOLDERS OF THE NOTES WILL BE SUBORDINATED TO CLAIMS BY HOLDERS OF OUR
  SENIOR DEBT.

    The notes rank behind all of our existing and future senior debt and
effectively behind all existing and future liabilities (including trade
payables) of our subsidiaries. As a result, if we declare bankruptcy, liquidate,
reorganize, dissolve or otherwise wind up our affairs or are subjected to
similar proceedings, we must repay all senior debt before we will be able to
make any payments on the notes. Likewise, upon a default in payment with respect
to any of our debt or an event of default with respect to this debt resulting in
its acceleration, our assets will be available to pay the amounts due on the
notes only after all senior debt has been paid in full. In addition, we have
located all of our inventory purchasing, distribution fulfillment functions,
customer service functions and other related activities in our distribution
subsidiary, eToys Distribution, LLC. The effect of this will be to increase the
amount of our subsidiary liabilities, especially during the third and fourth
calendar quarters. We may not have sufficient assets remaining to pay amounts
due on any or all of the notes then outstanding. The indenture does not prohibit
us or our subsidiaries from incurring additional senior debt, other debt or
other liabilities. Our ability to pay our obligations on the notes could be
adversely affected if we or our subsidiaries incur more debt.

    As of December 31, 2000, we had outstanding $47.5 million of senior debt and
$83.7 million of subsidiary liabilities (of which $27.8 million also qualifies
as senior debt) to which the notes are subordinated. Both we and our
subsidiaries expect that from time to time we will incur additional debt to
which the notes will be subordinated.

                                       24
<PAGE>
                         RISKS RELATED TO OUR BUSINESS

OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT.

    We were incorporated in November 1996. We began selling products on our Web
site in October 1997. As a result of our limited operating history, it is
difficult to accurately forecast our net sales and we have limited meaningful
historical financial data upon which to base planned operating expenses. For
example, during the quarter ending December 31, 2000, we had originally
estimated net sales between $210 million and $240 million, but in fact net sales
for the quarter were only $131.2 million due to a harsh retail climate and
dampened enthusiasm for Internet retailing. This also resulted in substantially
higher losses from operations than we had anticipated. We base our current and
future expense levels on our operating plans and estimates of future net sales,
and our expenses are to a large extent fixed. Sales and operating results are
difficult to forecast because they generally depend on the volume and timing of
the orders we receive. As a result, we are unable to adjust our spending in a
timely manner to compensate for any unexpected revenue shortfall. This inability
will cause our net losses in a given quarter to be greater than expected.

WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.

    We expect operating losses and negative cash flow to continue for the
foreseeable future. As of December 31, 2000, we had an accumulated deficit of
$429.2 million. We incurred net losses of $85.8 million for the quarter ended
December 31, 2000.

    Also, as a result of our acquisition of BabyCenter, we have recorded a
significant amount of goodwill, the amortization of which will significantly
reduce our earnings and profitability for the foreseeable future. The recorded
goodwill of approximately $189.0 million is being amortized over a five-year
period. To the extent we do not generate sufficient cash flow to recover the
amount of the investment recorded, the investment may be considered impaired and
could be subject to earlier write-off. In such event, our net loss in any given
period could be greater than anticipated and the market price of our stock could
decline.

ANY FAILURE BY US TO SUCCESSFULLY EXPAND OUR DISTRIBUTION OPERATIONS WOULD HAVE
A MATERIAL ADVERSE EFFECT ON US.

    Any failure by us to successfully expand our distribution operations to
accommodate increases in demand and customer orders would have a material
adverse effect on our business prospects, financial condition and operating
results. Under such circumstances, the material adverse effects may include,
among other things, an inability to increase net sales in accordance with the
expectations of securities analysts and investors; increases in costs that we
may incur to meet customer expectations; increases in fulfillment expenses if we
are required to rely on more expensive fulfillment systems than anticipated or
incur additional costs for balancing merchandise inventories among multiple
distribution facilities; loss of customer loyalty and repeat business from
customers if they become dissatisfied with our delivery services; and damage to
our reputation and brand image arising from uncertainty with respect to our
distribution operations. These risks are greatest during the fourth calendar
quarter of each year, when our sales increase substantially relative to other
quarters and the demand on our distribution operations increases
proportionately. In addition, consistent with industry practice for online
retailers, we notify our customers via our Web site that we cannot guarantee all
products ordered after a specified date in December will be delivered by
Christmas day, which may deter potential customers from purchasing from us
following that date. Since our limited operating history makes it difficult to
accurately estimate the number of orders that may be received during the fourth
calendar quarter, we may experience either inadequate or excess fulfillment
capacity during this quarter, either of which could have a material adverse
impact on us. The occurrence of one or more of these events would be likely to
cause the market price of our securities to decline further.

                                       25
<PAGE>
    We currently conduct our distribution operations through two facilities
operated by us, consisting of an approximately 763,000 square foot facility in
Ontario, California and two adjacent facilities totaling approximately
1.2 million square feet in Pittsylvania County, Virginia. We have in the past
devoted substantial resources to the expansion of our distribution operations
among these facilities. We are not experienced with coordinating and managing
distribution operations in geographically distant locations. This may result in
increased costs as we seek to meet customers' expectations, balance merchandise
inventories among our distribution facilities and take other steps that may be
necessary to meet the demands placed on our distribution operations,
particularly during the fourth calendar quarter of the year. There can be no
assurance that our existing or future distribution operations will be sufficient
to accommodate increases in demand and customer orders.

IF WE EXPERIENCE PROBLEMS IN OUR DISTRIBUTION OPERATIONS, WE COULD LOSE
CUSTOMERS.

    We rely upon third-party carriers for product shipments, including shipments
to and from our distribution facilities. We are therefore subject to the risks,
including employee strikes and inclement weather, associated with such carriers'
ability to provide delivery services to meet our shipping needs. In addition,
failure to deliver products to our customers in a timely and accurate manner
would damage our reputation and brand. We also depend upon temporary employees
to adequately staff our distribution facilities, particularly during the holiday
shopping season. If we do not have sufficient sources of temporary employees, we
could lose customers.

OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. FAILURE TO MEET THE
EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS HAS CAUSED THE MARKET PRICE
OF OUR SECURITIES TO DECLINE SIGNIFICANTLY.

    Our annual and quarterly operating results have fluctuated significantly in
the past. For example, during the quarter ending December 31, 2000, we had
originally estimated net sales between $210 million and $240 million, but in
fact net sales for the quarter were only $131.2 million due to a harsh retail
climate and dampened enthusiasm for Internet retailing. This also resulted in
substantially higher losses from operations than we had anticipated. Because our
operating results fell below the expectations of securities analysts and
investors, the trading price of our securities declined significantly. At this
time, we have been unable to predict our future results of operations and have
stated that we will be required to cease operations by approximately March 31,
2001 if we are unable to consummate a strategic transaction.

BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES, OUR QUARTERLY
RESULTS WILL FLUCTUATE AND OUR ANNUAL RESULTS COULD BE BELOW EXPECTATIONS.

    We have historically experienced and expect to continue to experience
seasonal fluctuations in our net sales. These seasonal patterns will cause
quarterly fluctuations in our operating results. In particular, a
disproportionate amount of our net sales have been realized during the fourth
calendar quarter and we expect this trend to continue in the future.

    In anticipation of increased sales activity during the fourth calendar
quarter, we hire a significant number of temporary employees to bolster our
permanent staff and we significantly increase our inventory levels. For this
reason, if our net sales are below seasonal expectations during this quarter,
our annual operating results could be below the expectations of securities
analysts and investors. This occurred during the quarter ending December 31,
2000, when we estimated net sales between $210 million and $240 million but
achieved net sales for the quarter of only $131.2 million. This resulted in a
significant decline in our common stock price and has caused us to seek a
strategic transaction or cease operations at or around March 31, 2001.

                                       26
<PAGE>
    Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of such seasonality on our business
and financial results. In the future, our seasonal sales patterns may become
more pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period.

WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS BETWEEN THE TIME THAT WE ORDER PRODUCTS AND THE TIME THAT WE RECEIVE
THEM.

    We carry a significant level of inventory. As a result, the rapidly changing
trends in consumer tastes in the market for children's products, including toys,
video games, books, software, videos, music, hobby products, party goods and
baby-oriented products, subject us to significant inventory risks. It is
critical to our success that we accurately predict these trends and do not
overstock unpopular products. The demand for specific products can change
between the time the products are ordered and the date of receipt. We are
particularly exposed to this risk because we derive a majority of our net sales
in the fourth calendar quarter of each year. Our failure to sufficiently stock
popular toys and other products in advance of such fourth calendar quarter would
harm our operating results for the entire fiscal year.

    In the event that one or more products do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
could reduce our net sales and gross margins. This risk may be greatest in the
first calendar quarter of each year, after we have significantly increased
inventory levels for the holiday season. We believe that this risk will increase
if we open new departments or enter new product categories due to our lack of
experience in purchasing products for these categories. In addition, to the
extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would subject us to additional
inventory risks.

WE WILL NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

    The online commerce market is intensely competitive. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could seriously harm our net sales and results of
operations. We expect competition to intensify in the future. In addition, the
children's products industries, including toy, video game, books, software,
video, music, hobby products, party goods and baby-oriented products, are
intensely competitive.

    We currently or potentially compete with a variety of other companies,
including:

    - other online companies that include toys and children's and baby products
      as part of their product offerings, such as Amazon.com (which has
      partnered with Toysrus.com), Barnesandnoble.com, CDnow, Beyond.com, iBaby,
      BabyCatalog.com, iVillage and Women.com;

    - traditional store-based toy and children's and baby products retailers
      such as Toys R Us, FAO Schwarz, Zany Brainy, Noodle Kidoodle, babyGap,
      GapKids, Gymboree, KB Toys, The Right Start and Babies R Us;

    - major discount retailers such as Wal-Mart, Kmart and Target;

    - online efforts of these traditional retailers, including the online stores
      operated by Toys R Us (at Amazon.com), Wal-Mart, FAO Schwarz, babyGap,
      GapKids, KB Toys (i.e., KB Kids) and Gymboree;

    - physical and online stores of entertainment entities that sell and license
      children and baby products, such as The Walt Disney Company and Warner
      Bros.;

    - catalog retailers of children's and baby products as well as products for
      toddlers and expectant mothers;

                                       27
<PAGE>
    - vendors or manufacturers of children's and baby products that currently
      sell some of their products directly online, such as Mattel and Hasbro;

    - Internet portals and online service providers that feature shopping
      services, such as AOL, Yahoo!, Excite and Lycos; and

    - various smaller online retailers of children's and baby products, such as
      Smarterkids.com.

    Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or suppliers of children's products,
including toys, video games, books, software, video, music, hobby products,
party goods and baby-oriented products as the use of the Internet and other
online services increases.

    Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. In light of our weaker-than-expected
operating results for the quarter ending December 31, 2000 and the risk that we
may be unable to continue operations after March 31, 2001, we believe we are, at
this time, unable to compete successfully against our competitors.

IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD FAIL TO ATTRACT NEW
CUSTOMERS.

    Any new department or product category that is launched or acquired by us
which is not favorably received by consumers could damage our brand or
reputation. This damage could impair our ability to attract new customers, which
could cause our net sales to fall below expectations. The expansion of our
business to include any new department or product category will require
significant additional expenses, and strain our management, financial and
operational resources. This type of expansion would also subject us to increased
inventory risk.

OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR OTHER UNEXPECTED
PROBLEM COULD DAMAGE OUR REPUTATION AND BRAND AND REDUCE OUR NET SALES.

    We are vulnerable to natural disasters and other unanticipated problems that
are beyond our control. Our office facilities in California house substantially
all of our product development and information systems. Our third-party Web site
hosting facilities located in Sunnyvale, California and Herndon, Virginia, house
substantially all of our computer and communications hardware systems. Our
distribution facilities located in California and Virginia house substantially
all of our product inventory. A natural disaster, such as an earthquake, or
harsh weather or other comparable problems that are beyond our control could
cause interruptions or delays in our business and loss of data or render us
unable to accept and fulfill customer orders. Any such interruptions or delays
at these facilities would reduce our net sales. In addition, our systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins, earthquakes and similar events. We
have no formal disaster recovery plan and our business interruption insurance
may not adequately compensate us for losses that may occur. In addition, the
failure by the third-party facilities to provide the data communications
capacity required by us, as a result of human error, natural disaster or other
operational disruptions, could result in interruptions in our service. The
occurrence of any or all of these events could damage our reputation and brand
and impair our business.

                                       28
<PAGE>
OUR NET SALES COULD DECREASE IF OUR ONLINE SECURITY MEASURES FAIL.

    Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result, we lose many customers,
our net sales could decrease. We rely on security and authentication technology
that we license from third parties. With this technology, we perform real-time
credit card authorization and verification with our bank. We cannot predict
whether events or developments will result in a compromise or breach of the
technology we use to protect a customer's personal information.

    Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins, denial of service attacks and similar disruptions. We may
need to expend significant additional capital and other resources to protect
against a security breach or to alleviate problems caused by any breaches. We
cannot assure that we can prevent all security breaches.

OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD.

    A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed technology to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.

WE FACE THE RISK OF INVENTORY SHRINKAGE.

    If the security measures we use at our distribution facilities do not reduce
or prevent inventory shrinkage, our gross profit margin may decrease. We have
undertaken a number of measures designed to address inventory shrinkage,
including the installation of enhanced security measures at our distribution
facilities. These measures may not successfully reduce or prevent inventory
shrinkage in future periods. Our failure to successfully improve the security
measures we use at our distribution facilities may cause our gross profit
margins and results of operations to be significantly below expectations in
future periods.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.

    If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services embodying new technologies, or if new industry standards and
practices emerge, our existing Web site and proprietary technology and systems
may become obsolete.

    To develop our Web site and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or we
may fail to adapt our Web site, our transaction processing systems and our
computer network to meet customer requirements or emerging industry standards.

INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.

    Other parties may assert infringement or unfair competition claims against
us. In the past, a toy distributor using a name similar to ours sent us notice
of a claim of infringement of proprietary rights, which claim was subsequently
withdrawn. We have also received a claim from the holders of a home shopping
video catalog patent and a remote query communication system patent that our
Internet

                                       29
<PAGE>
marketing program and Web site operations, respectively, infringe such patents,
and BabyCenter has received a claim from the holder of an automated registry
patent that its Web site infringes such patent. We have also received a notice
from etoy corporation, the owners of the "etoy" domain name, that they have
filed a trademark infringement action against us. We expect to receive other
notices from other third parties in the future. We cannot predict whether third
parties will assert claims of infringement against us, or whether any past or
future assertions or prosecutions will harm our business. If we are forced to
defend against any such claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, or product shipment delays. As a result of
such a dispute, we may have to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may be unavailable on terms acceptable to us, or at all. If there is a
successful claim of product infringement against us and we are unable to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, it could impair our business.

IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND AND REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.

    The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We currently hold registered trademarks for "eToys" and
"BabyCenter". We have received notice from etoy corporation, the owners of the
"etoy" domain name, that they have filed a trademark infringement action against
us with respect to the use of our "eToys" trademark. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which we will sell our products and services online.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our trademarks and
other proprietary rights.

THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE,
COULD DISRUPT OUR OPERATIONS AND RESULT IN A REDUCTION IN NET SALES.

    The loss of the services of one or more of our key personnel could seriously
interrupt our business. We depend on the continued services and performance of
our senior management and other key personnel, particularly Edward C. Lenk, our
President, Chief Executive Officer and Chairman of the Board. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel as well as the successful integration of
BabyCenter's management with our senior management team. Our relationships with
our officers and key employees are generally at will. We do not have "key
person" life insurance policies covering any of our employees.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SECURITYHOLDERS.

    Provisions of our amended and restated certificate of incorporation, our
amended and restated bylaws and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
securityholders.

                                       30
<PAGE>
    We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:

    - the board of directors approved the transaction in which such stockholder
      became an interested stockholder prior to the date the interested
      stockholder attained such status;

    - upon consummation of the transaction that resulted in the stockholder's
      becoming an interested stockholder, he or she owned at least 85% of the
      voting stock of the corporation outstanding at the time the transaction
      commenced, excluding shares owned by persons who are directors and also
      officers; or

    - on or subsequent to such date the business combination is approved by the
      board of directors and authorized at an annual or special meeting of
      stockholders.

    A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.

    Our amended and restated certificate of incorporation and amended and
restated bylaws do not provide for the right of stockholders to act by written
consent without a meeting or for cumulative voting in the election of directors.
In addition, our amended and restated certificate of incorporation permits the
board of directors to issue preferred stock with voting or other rights without
any stockholder action. Also in accordance with our amended and restated
certificate of incorporation, our board of directors has been divided into three
classes, with staggered three-year terms. As a result, only one class of
directors will be elected at each annual meeting of stockholders. These
provisions of our amended and restated certificate of incorporation, which
require the vote of stockholders holding at least a majority of the outstanding
common stock to amend, may have the effect of deterring hostile takeovers or
delaying changes in our management.

                         RISKS RELATED TO OUR INDUSTRY

IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.

    We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand. Such use could damage our brand and
reputation and take customers away from our Web site. We currently hold various
relevant domain names, including the "eToys.com" and "BabyCenter.com" domain
names. We have received a notice from etoy corporation, the owners of the "etoy"
domain name, that they have filed a trademark infringement action against us.
The acquisition and maintenance of domain names generally is regulated by
governmental agencies and their designees. The regulation of domain names in the
United States and in foreign countries is subject to change in the near future.
Such changes in the United States are expected to include the creation of
additional top-level domains. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names.

WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.

    The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which we currently conduct our business. In
addition, the growth and development of

                                       31
<PAGE>
the market for online commerce may lead to more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on us. Laws and regulations directly applicable to communications or commerce
over the Internet are becoming more prevalent. The United States Congress has
enacted Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material, and the Federal Trade Commission's
Children's Online Privacy Protection Act became effective April 21, 2000. The
European Union has enacted its own privacy regulations. In addition, we are
subject to existing federal, state and local regulations pertaining to consumer
protection, such as the Federal Trade Commission's Mail and Telephone Order
Rule. The law of the Internet, however, remains largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws such as those governing intellectual property,
privacy, libel and taxation apply to the Internet. Any failure by us to comply
with the rules and regulations applicable to our business could result in action
being taken against us that could have a material adverse effect on our business
and results of operations.

    In order to comply with new or existing laws regulating online commerce, we
may need to modify the manner in which we do business, which may result in
additional expenses. For instance, we may need to spend time and money revising
the process by which we fulfill customers' orders to ensure that each shipment
complies with applicable laws. We may need to hire additional personnel to
monitor our compliance with applicable laws. We may also need to modify our
software to further protect our customers' personal information.

WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.

    As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. In particular, our BabyCenter Web site offers a variety of content
for new and expectant parents, including content relating to pregnancy,
fertility and infertility, nutrition, child rearing and related subjects, and
our ParentCenter Web site offers a variety of content for children aged 3 to 12,
including content related to child rearing and related subjects. If we face
liability, then our reputation and our business may suffer. In the past,
plaintiffs have brought these types of claims and sometimes successfully
litigated them against online services. Although we carry general liability
insurance to cover claims of these types, there can be no assurance that such
insurance will be adequate to indemnify us for all liability that may be imposed
on us.

OUR NET SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES AND OTHER TAXES.

    If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
California. However, one or more local, state or foreign jurisdictions may seek
to impose sales tax collection obligations on us. In addition, any new operation
in states outside California could subject our shipments in such states to state
sales taxes under current or future laws. If we become obligated to collect
sales taxes, we will need to update our system that processes customers' orders
to calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. These upgrades will
increase our operating expenses. In addition, our customers may be discouraged
from purchasing products from us because they have to pay sales tax, causing our
net sales to decrease. As a result, we may need to lower prices to retain these
customers.

                                       32
<PAGE>
                      RISKS RELATED TO SECURITIES MARKETS

IT IS UNLIKELY THAT WE WILL BE ABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.

    Since December 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are expected to be sufficient to meet
our anticipated cash needs only to approximately March 31, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an additional, substantial capital infusion. We do not
believe that additional capital will be available to us.

    We have engaged a financial advisor to explore strategic alternatives for
the company, which might include a merger, asset sale, or another comparable
transaction or a financial restructuring. However, in the event we are
unsuccessful in completing one of these strategic alternatives, we will be
required to cease operations by approximately March 31, 2001. In that case, we
will be unable to meet our future capital requirements and our common stock will
have no value. In addition, potential investors in our securities should
consider the risk that, even if we are successful in completing a strategic
transaction as described above, our common stock will nonetheless have no value.

THE MARKET PRICE OF OUR SECURITIES IS HIGHLY VOLATILE AND HAS RECENTLY FALLEN
SIGNIFICANTLY.

    The market price for our securities has been and is likely to continue to be
highly volatile and subject to substantial decreases in response to factors
including the following:

    - actual or anticipated variations in our quarterly operating results, such
      as during the quarter ending December 31, 2000, when we originally
      estimated net sales between $210 million and $240 million but in fact
      achieved net sales for the quarter of only $131.2 million;

    - announcements of technological innovations, increased cost of operations
      or new products or services by us or our competitors;

    - changes in financial estimates by securities analysts;

    - conditions or trends in the Internet and/or online commerce industries;

    - changes in the economic performance and/or market valuations of other
      Internet, online commerce or retail companies;

    - volatility in the stock markets, particularly with respect to Internet
      stocks, and decreases in the availability of capital for Internet-related
      businesses; and

    - potential litigation.

    From May 20, 1999 (the first day of public trading of our common stock),
through February 12, 2001, the high and low sales prices for our common stock
fluctuated between $86.00 and $0.03. On February 12, 2001, the closing price of
our common stock was $0.16. In the past, following periods of volatility in the
market price of their securities, many companies have been the subject of
securities class action litigation. If we were sued in a securities class
action, it could result in substantial costs and a diversion of management's
attention and resources and would cause the prices of our securities to fall.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We are subject to market risk related to changes in foreign currency
exchange rates and interest rates. We do not use derivative financial
instruments.

    FOREIGN CURRENCY RISK.  We currently have wholly-owned subsidiaries with
operations in the United Kingdom and Europe. All sales and expenses incurred by
the foreign subsidiaries are denominated in the British pound and Euro, which
are considered the functional currencies of the respective

                                       33
<PAGE>
subsidiaries. As such, we are exposed to foreign currency risk which arises in
part from funding denominated in British pounds and Euros provided to the
foreign subsidiaries and from the translation of the foreign subsidiaries'
financial results into U.S. dollars during consolidation. As exchange rates
vary, our results from operations and profitability may be adversely impacted.
As of December 31, 2000, the effect of the foreign currency exchange rate
fluctuations has not been significant.

    INTEREST RATE RISK.  We maintain a portfolio of highly liquid cash
equivalents maturing in three months or less as of the date of purchase. Given
the short-term nature of these investments, we believe we are not subject to
significant interest rate risk with respect to these investments. Additionally,
we are subject to interest rate risk related to the $150 million of convertible
notes, borrowings under our revolving credit facility and our notes payable and
capital lease obligations. Our notes payable and capital lease obligations bear
interest at fixed rates, and their carrying amount approximates fair value based
on borrowing rates currently available to us. As such, we believe that market
risk arising from our notes payable and capital lease obligations is not
significant. The revolving credit facility bears interest at variable rates and
therefore its carrying value is considered to approximate its fair value.

    The convertible notes, issued in December 1999, are unsecured and are
subordinated to our existing and future senior debt as defined in the indenture
pursuant to which the convertible notes were issued. The principal amount of the
convertible notes will be due on December 1, 2004 and will bear interest at an
annual rate of 6.25%, payable twice a year, on June 1 and December 1, beginning
June 1, 2000, until the principal amount of the convertible notes is fully
repaid. The convertible notes may be converted into our common stock at the
option of the holder at any time prior to December 1, 2004, unless the
convertible notes have been previously redeemed or repurchased by us. The
conversion rate, subject to adjustment in certain circumstances, is 13.5323
shares of our common stock for each $1,000 principal amount of convertible
notes, which is equivalent to a conversion price of approximately $73.90 per
share. As of December 31, 2000, the carrying value of the convertible notes was
$150 million. As of December 31, 2000, the fair value of the convertible notes
was $16.3 million based upon the closing market price as of that date. The
difference between the carrying value and the fair value of the convertible
notes as of December 31, 2000 is primarily due to declines in the price of our
common stock and the favorable interest rate of the convertible notes as
compared to current interest rates.

                                       34
<PAGE>
PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    See Note 5, Commitments and Contingencies, in Part I, Item 1, Consolidated
Financial Statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    As of December 31, 2000, in addition to $150 million of our 6.25%
convertible subordinated notes due December 1, 2004 and $8.9 million of
borrowings under our revolving credit facility, our outstanding liabilities
included notes payable and capital lease obligations of $38.6 million, a trade
payable balance of $38.1 million, a non-trade payable balance of $36.3 million
and accrued expenses of $13.1 million. On January 16, 2001, we entered into a
standstill agreement with an informal committee of our unsecured creditors.
Pursuant to this agreement, through and including February 15 (subject to
extension by agreement of the committee), we have agreed not to pay any past due
debts and to operate under a budget designed to maintain our current operations.
Such non-payment of past due debts may result in a default on some or all of the
obligations described above.

    In the event that the registration statement relating to the series D
preferred shares and related warrants is unavailable to cover the resale of the
shares of common stock underlying the series D preferred stock, we will be in
default under the terms of the series D preferred stock. Currently, at least one
holder of series D preferred shares has only a limited number of common shares
available under the registration statement, and we have no plans at this time to
make additional shares of common stock available under the registration
statement. Accordingly, we may soon be in default under this provision of the
series D preferred stock.

    Since December 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are expected to be sufficient to meet
our anticipated cash needs only to approximately March 31, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an additional, substantial capital infusion. We do not
believe that additional capital will be available to us.

    We have engaged a financial advisor to explore strategic alternatives for
the company, which might include a merger, asset sale, or another comparable
transaction or a financial restructuring. However, in the event we are
unsuccessful in completing one of these strategic alternatives, we will be
required to cease operations by approximately March 31, 2001. In that case, we
will be unable to meet our future capital requirements. This would result in a
default under all of our indebtedness, including our $40 million revolving
credit facility (which had an outstanding balance of $8.9 million as of
December 31, 2000) and the $150.0 million of our 6.25% convertible subordinated
notes due December 1, 2004, as well as the other obligations described above in
this section.

    Potential investors in our securities should consider the risk that we may
be in default under all of these obligations and that, in that event, our common
stock will have no value.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None

ITEM 5. OTHER INFORMATION

    None.

                                       35
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

<TABLE>
<CAPTION>

<S>                     <C>        <C>
                           3.1     Amended and Restated Bylaws (as of December 18, 2000)

                          10.1     Letter Agreement between eToys and Edward C. Lenk dated
                                   December 4, 2000

                          10.2     Letter Agreement between eToys and Steve Schoch dated
                                   December 4, 2000

                          10.3     Letter Agreement between eToys and John Hnanicek dated
                                   December 4, 2000

                          10.4     Standstill Agreement between eToys and the Informal
                                   Committee of Unsecured Creditors of eToys dated January 16,
                                   2001

                          10.5     First Amended Standstill Agreement between eToys and the
                                   Informal Committee of Unsecured Creditors of eToys dated
                                   February 1, 2001
</TABLE>

    (b) Reports on Form 8-K

       Form 8-K dated November 15, 2000 pertaining to the company's revolving
       credit facility.

       Form 8-K dated November 28, 2000 pertaining to certain risk factor
       information of the company.

       Form 8-K dated December 15, 2000 pertaining to a press release regarding
       the company's estimated results of operations for its fiscal third
       quarter ending December 31, 2000.

       Form 8-K dated January 4, 2001 pertaining to a press release regarding
       the company's cost reduction initiatives.

                                       36
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, eToys
Inc. has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

<TABLE>
<S>                                                    <C>  <C>
                                                       eTOYS INC.

                                                       By:             /s/ STEVEN J. SCHOCH
                                                            -----------------------------------------
                                                                         Steven J. Schoch
                                                                   EXECUTIVE VICE PRESIDENT AND
                                                                     CHIEF FINANCIAL OFFICER
</TABLE>

Dated:  February 14, 2001

                                       37
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBITS
--------
<C>                     <S>
         3.1            Amended and Restated Bylaws (as of December 18, 2000)

        10.1            Letter Agreement between eToys and Edward C. Lenk dated
                        December 4, 2000

        10.2            Letter Agreement between eToys and Steve Schoch dated
                        December 4, 2000

        10.3            Letter Agreement between eToys and John Hnanicek dated
                        December 4, 2000

        10.4            Standstill Agreement between eToys and the Informal
                        Committee of Unsecured Creditors of eToys dated January 16,
                        2001

        10.5            First Amended Standstill Agreement between eToys and the
                        Informal Committee of Unsecured Creditors of eToys dated
                        February 1, 2001
</TABLE>

                                       38